Up to 6 columns - 6 major signals from the central bank's monetary policy report for the first quarter

Event: On May 9, the central bank released the "Monetary Policy Implementation Report for Q1 2025" (hereinafter referred to as the "Report"), which includes 6 special columns (previously mostly 4): "Ten-Year Evolution of Medium-term Lending Facility," "Continuously Improving Financial Services to Support Consumption Boost and Expansion," "Explicit Comprehensive Financing Costs of Corporate Loans," "Strengthening Bond Market Construction to Support Healthy Development of the Bond Market," "Comparative Analysis of Government Debt Situations in China, the U.S., and Japan from the Perspective of Government Balance Sheets," and "Supply and Demand Relationships in the Real Economy and Price Changes."

Core Viewpoints: The tone of this report basically continues the expressions from the Q4 2024 report, the 4.25 Politburo meeting, and the 5.7 State Council Information Office press conference, including "implementing a moderately loose monetary policy; resolutely preventing excessive exchange rate adjustment risks," etc. However, there are also many new phrases and requirements, focusing on two aspects: first, from "three balances" to "four balances," with an added emphasis on balancing "supporting the real economy and maintaining the health of the banking system," indicating that the central bank is paying more attention to banks' net interest margins and sustainability issues, and it explicitly pointed out "reducing banks' liability costs," suggesting that a new round of deposit rate cuts is expected to be implemented soon; second, the addition of "flexibly grasping the intensity and rhythm of policy implementation," providing a clearer explanation of the central bank's operational model, with the "reduction principle" and "discretionary choice" characteristics of future central bank operations becoming more prominent. In addition, this report has as many as 6 special columns (previously mostly 4), among which: Column 6 discusses the fundamental reasons for the low operation of prices in our country; Column 5 discusses the sustainability of debt in China, the U.S., and Japan from the perspective of government balance sheets. Looking ahead, it continues to indicate: monetary easing is still the general direction, and after the 5.7 reserve requirement ratio and interest rate cuts, monetary policy will enter an observation period in the short term; it tends to believe that under tariff shocks, China's economy will face significant pressure, and there is a high probability of further reserve requirement ratio and interest rate cuts within the year, closely monitoring the progress of China-U.S. negotiations. Specifically, there are 6 major signals:

Signal 1: The central bank's concerns about the global economy have deepened, believing that "the momentum of global economic growth is weakening," continuing to point out that "the geopolitical situation still has considerable uncertainty," and "there are constraints on global trade and investment growth," etc., with an added emphasis on "U.S. tariff policies raising the risk of global recession; financial market volatility is intensifying"; regarding the domestic economy, the central bank faces difficulties head-on, pointing out that "the current external environment is becoming more complex and severe, unilateralism and protectionism are intensifying, and geopolitical conflicts persist," yet it also rises to the challenge, stating that "there is potential and support to achieve this year's economic and social development expected goals," and that it must "respond to the uncertainties of external environmental changes with the certainty of high-quality development."

Signal 2: Regarding global inflation, the central bank believes that major economies have "seen a decline in price increases," but "upward pressure still exists in the future." For domestic inflation, the central bank states that with the "effective implementation of policies to expand domestic demand, market demand is accelerating," and that China's price level "is expected to maintain a low rebound trend," with the central bank also specifically opening a special column, Discussed the low-level operation of prices in our country, the fundamental reason is that "the contradiction of strong supply and weak demand in the real economy continues to exist," emphasizing that "the relationship between currency and prices is also influenced by multiple factors," and "the role of currency on prices depends on the supply-demand comparison situation."

Signal 3: The monetary policy tone basically continues the expressions from the previous 2024 Q4 report and the 4.25 Politburo meeting, including "implementing a moderately loose monetary policy," "resolutely preventing exchange rate overshooting risks," and "taking the promotion of reasonable price recovery as an important consideration in grasping monetary policy," etc. However, there are also many new proposals, focusing on two aspects:

> First, greater emphasis on the net interest margin of banks and ongoing operational issues, with new emphasis on balancing the relationship between "supporting the real economy and maintaining the health of the banking system," clearly pointing out "reducing the cost of bank liabilities," and a new round of deposit rate cuts is expected to be implemented soon;

> Second, the addition of "flexibly grasping the intensity and pace of policy implementation," which also echoes the "reduction principle" reflected in the5.7interest rate cut. Looking ahead, it continues to indicate: monetary easing remains the general direction, after the5.7reserve requirement ratio and interest rate cuts, monetary policy enters an observation period, and if the fundamentals weaken further, additional reserve requirement ratio and interest rate cuts can still be expected.

Signal 4: The weighted average interest rate on loans in the first quarter has risen, marking the first increase since the first quarter of last year, with a significant rise in bill financing rates being the main driver, and mortgage loan rates have also increased.

Signal 5: Column 5 "Comparing Government Debt Situations in China, the U.S., and Japan from the Perspective of Government Department Balance Sheets" dissects the balance sheets of the "broad government sector" in the three countries, finding that "the sustainability of government debt is closely related not only to the scale of debt but also to the structure of government assets and liabilities, and the ability to generate returns on assets."

Signal 6: Column 1 "Ten-Year Evolution of Medium-term Lending Facility" systematically reviews the three historical stages of MLF, pointing out that in the future, MLF will "return to its basic positioning as a medium-term liquidity injection tool."

The main text is as follows:

Signal 1: The central bank's concerns about the global economy have deepened, believing that "the momentum of global economic growth is weakening," continuing to point out that "the geopolitical situation still has significant uncertainties," and "global trade and investment growth faces constraints," etc., with new emphasis on "U.S. tariff policies raising the risk of global recession; financial market volatility intensifying"; regarding the domestic economy, the central bank faces difficulties head-on, pointing out that "the current external environment is becoming more complex and severe, with unilateralism and protectionism intensifying, and geopolitical conflicts continuing to exist," yet it also embraces challenges, stating that "there is potential and support to achieve this year's economic and social development expected goals," and that it must "respond to the uncertainties of external environmental changes with the certainty of high-quality development."

Regarding the global economy: Central banks are increasingly worried, believing that "the momentum for global economic growth is weakening, and country-specific differentiation is becoming more apparent." They continue to point out that "geopolitical situations still have significant uncertainties," and "many countries face fiscal and debt risks, which constrain global trade and investment growth." The central bank also cited forecasts from organizations such as the International Monetary Fund, predicting a growth rate of 2.8%-3.3% for 2025, lower than that for 2024. Additionally, the central bank emphasized that "U.S. tariff policies are raising the risk of global recession" and that "global policy uncertainties are increasing, which may exacerbate fluctuations in international financial markets."

Regarding the domestic economy: The central bank directly faces difficulties, pointing out that the external environment is "becoming more complex and severe, with insufficient momentum for global economic growth, increasing unilateralism and protectionism, and ongoing geopolitical conflicts." Internally, it also faces issues such as "insufficient growth momentum for effective demand, operational difficulties for some enterprises, and pressure on employment and income for the public." At the same time, it is rising to the challenge, emphasizing that "there is potential and support to achieve this year's economic and social development goals," mainly for three reasons: "First, new momentum is growing rapidly; second, market demand is steadily recovering; third, the economic foundation is solid, and macroeconomic regulation is effective," indicating that it will "respond to the uncertainties of external environmental changes with the certainty of high-quality development."

Signal 2: Regarding global inflation, the central bank believes that major economies have seen "a decline in price increases," but "upward pressure still exists in the future." For domestic inflation, the central bank stated that with the "effective implementation of policies to expand domestic demand, market demand is accelerating," and China's price level "is expected to maintain a low rebound trend." The central bank also opened a special column discussing the low price operation in China, stating that the fundamental reason is that "the contradiction between strong supply and weak demand in the real economy continues to exist," emphasizing that "the relationship between money and prices is also influenced by multiple factors," and that "the role of money on prices depends on the supply-demand comparison."

Regarding global inflation: The central bank believes that major economies have seen "a decline in price increases," but "upward pressure still exists, and whether inflation can continue to decline remains to be observed," mainly for two reasons: First, "U.S. tariff policies will directly drive up the prices of imported goods, leading to an increase in the cost of living for residents, which will also push up production costs and further exacerbate inflationary pressures." Second, "wage growth in the U.S. and Europe remains relatively fast, exceeding the growth rate of consumer prices, making service inflation potentially more stubborn."

Regarding China's inflation: The central bank believes that in the short term, "with the effective implementation of policies to expand domestic demand, market demand is accelerating," and China's "price level is expected to maintain a low rebound trend." In the medium term, "China's economic structural transformation and industrial upgrading are steadily advancing, and the supply-demand relationship in the real economy is expected to become more balanced, leading to smoother economic circulation," with price stability having a "solid foundation." This report also opened a special column discussing the reasons for low prices, with two main conclusions: First, the continuous low price level in China is fundamentally due to "the ongoing contradiction between strong supply and weak demand in the real economy," including constraints on the demand side where "effective demand still faces some restrictions," and excessive competition in some sectors on the supply side; second, "the relationship between money and prices is also influenced by multiple factors," and "the relationship between prices and money is difficult to simply extrapolate linearly based on traditional theories," with the role of money on prices depending on the supply-demand comparison Under the development model that emphasizes increasing investment and ensuring supply, increasing the money supply will instead lead to capacity expansion and "intensify the imbalance of oversupply." Finally, the central bank emphasizes that the key to boosting prices lies in "expanding effective demand, smoothing the supply-demand cycle, and addressing the bottlenecks in the real economy."

Signal 3: The monetary policy tone basically continues the expressions from the previous 2024 Q4 report and the 4.25 Politburo meeting, including "implementing a moderately loose monetary policy," "resolutely preventing exchange rate overshooting risks," and "taking the promotion of reasonable price recovery as an important consideration for grasping monetary policy." However, there are also many new proposals, focusing on two aspects: first, greater emphasis on the net interest margin of banks and ongoing operational issues, with new emphasis on balancing the "relationship between supporting the real economy and maintaining the health of the banking system," clearly stating "reducing the cost of bank liabilities," and a new round of deposit rate cuts is expected to be implemented soon; second, the addition of "flexibly grasping the intensity and pace of policy implementation," which also echoes the "reduction principle" reflected in the 5.7 interest rate cut. Looking ahead, it continues to indicate that monetary easing remains the general direction, and after the 5.7 reserve requirement ratio and interest rate cuts, monetary policy enters an observation period, and if the fundamentals weaken further, additional reserve requirement ratio and interest rate cuts are still possible.

First, the monetary policy tone basically continues the expressions from the previous 2024 Q4 report and the 4.25 Politburo meeting, including the continued emphasis on "implementing a moderately loose monetary policy," and in execution, it is necessary to "balance short-term and long-term, stable growth and risk prevention, internal balance and external balance," and "taking the promotion of reasonable price recovery as an important consideration for grasping monetary policy," etc., while regarding the exchange rate, "maintaining the RMB exchange rate basically stable at a reasonable and balanced level," etc.

Second, this report places greater emphasis on the net interest margin of banks and ongoing operational issues, for the first time emphasizing the need to balance the "relationship between supporting the real economy and maintaining the health of the banking system," clearly stating the need to "reduce the cost of bank liabilities." By the end of 2024, the overall net interest margin of Chinese banks is 1.52%, only slightly higher than the non-performing loan ratio (1.5%), which indeed reflects the increasing pressure on banks' ongoing operations. Given that after this round of interest rate cuts, the yield on bank assets has decreased and the pressure on interest margins has increased, it is highly likely that the cost on the liability side will also need to be reduced, and a new round of deposit rate cuts is expected to be implemented soon.

Third, the central bank has newly emphasized "flexibly grasping the intensity and pace of policy implementation," providing further clarification on the central bank's operational model. In fact, the 5.7 interest rate cut of 10BP by the central bank, which is overall restrained, also aligns with this expression, mainly considering that there is significant uncertainty due to tariff disturbances, and small, multiple interest rate cuts are more conducive to the central bank's "discretionary choices." Looking ahead, the central bank's operational "reduction principle" will become more prominent, meaning that policies will be adjusted more flexibly according to economic conditions Signal 4: The weighted average interest rate on loans in the first quarter has risen, marking the first increase since the first quarter of last year, with a significant rise in bill financing rates being the main driver, and mortgage loan rates also increasing. The report points out that the weighted average interest rate on newly issued loans in March was 3.44%, an increase of 0.16 percentage points from the end of last year, of which the bill financing rate was 1.55%, up 0.53 percentage points from the end of last year, which is the main driver; the residential mortgage rate was 3.13%, also up 0.04 percentage points from the end of last year; the weighted average interest rate on corporate loans was 3.26%, down 0.08 percentage points from the end of last year, continuing to hit a new low.

Signal 5: Column 5 "Comparing Government Debt Situations in China, the U.S., and Japan from the Perspective of Government Department Balance Sheets" dissects the balance sheets of the "broad government sector" in China, the U.S., and Japan, finding that "the sustainability of government debt is closely related not only to the scale of debt but also to the structure of government assets and liabilities, as well as the income-generating capacity of assets."

For the U.S., the scale of debt as a percentage of GDP is significantly greater than that of assets, and the government sector is basically unable to achieve structural surpluses through asset-liability operations. The sustainability of debt largely depends on economic growth potential, deficit control capabilities, and the status of reserve currency;

For Japan, the balance sheet of the broad government sector shows "high debt and high asset characteristics." The government achieves certain investment returns through asset-liability operations, but if inflation rises significantly or the yen depreciates sharply, the valuation of assets may shrink significantly, leading to fiscal risks, and may also produce adverse distribution effects;

For China, total assets exceed total liabilities, and the assets owned by the broad government sector are mainly state-owned enterprise equities. From the perspective of the government department balance sheet, the expansion of government debt in China still has corresponding asset support.

Signal 6: Column 1 "The Ten-Year Evolution of Medium-term Lending Facility" systematically reviews the three historical stages of MLF, pointing out that in the future, MLF will "return to its basic positioning as a medium-term liquidity injection tool." The changes in MLF mainly include three stages: the first stage is "transitioning from an auxiliary tool for liquidity injection to a total quantity monetary policy tool," the second stage is "expanding from a single quantitative tool to a stage that reflects interest rate tool attributes," and the third stage is "gradually exiting the policy interest rate attribute and returning to a liquidity injection tool." Looking ahead, as the transformation of the monetary policy framework continues to advance, the positioning of MLF as a liquidity injection tool will become clearer, focusing on providing one-year liquidity.

Author of this article: Guosheng Macro Xiong Yuan Team, Source: Xiong Yuan Guan Cha (ID: gh_b8da3439a34e), Original title: "Column with up to 6 - Six Major Signals from the Central Bank's First Quarter Monetary Policy Report" Risk Warning and Disclaimer

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